Money9 Helpline | Good loan vs bad loan: All you need to know

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Taking a loan is often is the only way many people can afford to purchase important big-ticket items like a home. But there is a difference between good and bad loans. It is important that one is not stuck in the maze of debt.

Money9 Helpline hosted Viral Bhatt of Money Mantra to help you understand the difference between a good loan and a bad loan

Ashish Gupta, Mathura: My monthly income is Rs 50,000 and my monthly expenses are Rs 15,000-20,000. I want to buy a car. How much loan should I avail keeping my income in mind?

Bhatt: I would suggest going for a car loan only if it is a necessity. If you really need to buy a car, then only you should avail of a loan. If you are taking a loan then you can pay off via EMIs. For the loan, you can shell out 30 to 40 % of your income, after considering your expenses and affordability.

Live audience: Can you share a checklist to identify good and bad loans?

Bhatt: You need to assess your affordability. See if the loan does not stretch your expense and income ratio. Another parameter is interest rates, how much interest rates are being charged. For example, for home loans, the rates of interest are comparatively on the lower side, whereas for credit cards the interest rates are exorbitant. So you need to look at if how affordable and necessary the loan is for your financial life.

Surasha Mukherjee: My personal loan outstanding is Rs 3 lakh and my credit card due is Rs 30,000. My PPF and EPF corpus are more than Rs 5 lakh each. I am planning to buy a new car. Should I opt for a car loan against PPF and EPF?

Bhatt: I would suggest not to take a loan against EPF and PPF. See if there are any other investments that can fund your purchase. You should defer taking a loan right now. As there are current loans, you must first pay off those dues for better management and affordabilty.